The Road To 1600

NOTE: Every week or two I wrote a Client Note for my clients. I post the notes to my blog but with a time delay usually between 1 day and 1 week. To receive the Client Notes at the same time as my clients, sign up in the box in the right hand corner of the website.

*****

I have to admit it: I never thought we’d get here. New all-time highs on the S&P 500. Over the last four years, again and again I’ve learned the hard way the relentlessness of this bull market. I am humbled. The last time I felt this way was three years ago when I wrote a Client Note titled “I Was Wrong” (April 5, 2010).

Even traders who have been bullish are amazed. In a blog post from Tuesday night titled “The Big Challenge For Many Traders”, veteran trader Joe Fahmy wrote: “It feels like almost every time I see warning signs and turn cautious, the market magically picks up a bid and grinds higher. It is really amazing!” His advice: “Just stick with the terms uptrend or downtrend and stop trying to be an economist about the whole thing.”

Similarly, technician Andrew Thrasher wrote in a blog post Wednesday morning: “All the negative divergence is telling us is that the car tires are losing a little air. This doesn’t mean the car drives off into a ditch, it’s just a warning that the driver needs to be aware of…. They are warnings. They let us know something is happening ‘below ground’ so to speak” (“Technical Analysis Doesn’t Have To Be Difficult”, April 10).

In the last couple of weeks, even bad economic data have not been enough to derail this market for more than a day or two. Two of the most important – March ISM Manufacturing and BLS Jobs Report – both came in notably weak but were absorbed within a matter of hours. The Fed Minutes released today raise some concern about the Fed pulling back but no one cares.

Just this morning $15 billion bellwether industrial Fastenal (FAST), which sells all sorts of construction and industrial supplies, reported growing weakness in their business: “With the benefit of hindsight, we believe the economic activity of our customers slowed from January to February and slowed further from February to March” (Fastenal Earnings Release, April 10). A glance at their homepage shows the wide array of industrial supplies and equipment they sell to customers worldwide. As the S&P soars into uncharted territory, nobody seems to notice that FAST is down 4%.

The one bullish development which may be driving this latest leg up is the bazooka unveiled last Thursday by the Bank Of Japan. The BOJ has declared war on deflation and will aim to double Japan’s monetary base over a two year period primarily by buying Japanese Government Bonds (JGBs) at a pace of 50¥ trillion/year. That’s $500 billion for an economy one third the size of the US. Japan has become “the most interesting story in global economics” (Neil Irwin WonkBlog, April 8). The whole world is watching because they are only doing to a higher degree what everyone else is. It won’t be long when we have to start talking about quadrillions when discussing the Japanese economy tweeted CNBC’s Kelly Evans. It makes our Quantitative Easing policies look like a squirt gun.

While today’s action probably paves the path to 1600 in the next couple of days, I remain extremely cautious.